Tata Steel: Recovery in India business is keeping sentiment elevated

Reviving domestic prices along with improving product mix to aid growth

Tata Steel’s weak performance in the June quarter (Q1), announced on Thursday, failed to deter the Street’s confidence, as the outlook has improved after the lockdown was lifted. The stock was up 1.3 per cent on Friday, when Sensex was down 1.1 per cent.

Though the lockdown impacted domestic steel volumes and realisations, and Tata Steel’s Europe business saw much deeper impact leading to an operating loss, the Street remains confident of a rebound in India operations, supporting overall growth. Improving capacity utilisations, rising domestic and international steel prices are key reasons for the buoyant sentiment.

Tata Steel India’s sales volume at 3.96 million tonne (MT) was marginally lower than the 4.03 MT in the March quarter, but significantly higher than 2.93 MT a year ago. The company managed to ramp up exports to 1.46 MT even as India sales declined 27 per cent year-on-year (YoY). Weak demand in India, lower sales of flat steel products to auto sector and higher exports (less profitable) meant that the company’s standalone per tonne profitability at Rs 6,100 was less than half of the Rs 12,573 seen in the March quarter and Rs 14,218 a year ago. Positively, after easing of the lockdown, overall deliveries in June improved significantly to 115 per cent of the FY20 monthly average, said Tata Steel. With volumes normalising, the outlook has been boosted thanks to strong demand from China, which is lifting international and domestic steel prices. Chinese domestic hot rolled coil prices at $568 a tonne are at their highest levels since July 2019, while domestic players have taken price hikes of about Rs 2,800 a tonne in the past month.

 

 

This will also benefit Tata Steel BSL, which is undergoing expansion. Tata Steel BSL’s sales volumes, too, reached pre-Covid levels in June, and importantly, free cash flow generation led to reduction in net debt by Rs 577 crore. Tata Steel’s consolidated net debt at Rs 104,692 crore was slightly lower than the Rs 104,779 crore at the end of March.

Higher prices will benefit exports and realisation of European operations, which saw 12 per cent decline in volumes. This, along with severe oversupply impacted product-mix and realisations resulting in an operating loss of Rs 626 crore. Continuous improvement from the transformation programme, careful cost management and wage support from the European and UK governments helped limit the loss. The company said, it continues to engage with these governments to seek support. The developments on restructuring are key for a turnaround in European operations. Nevertheless, analysts maintain a positive outlook for Tata Steel. 
 

ICICI Securities said, reviving domestic prices, improved mix, resilient iron ore prices and sanguine balance sheet management can help Tata Steel meaningfully outperform peers.